Citigroup penalised for fraudulent credit card practice

28 August 2008

There seems to be no end to Citigroup's recent woes. Within three weeks of agreeing to a record settlement on the contentious issue of auction rate securities, America's largest bank finds itself liable to pay a $3.5-million penalty for allegedly sweeping more than $14 million from customers' credit card accounts into the bank's own funds. (See: Citigroup to settle with authorities on securities fraud)

Citigroup will make refunds to the 53,000 customers affected, and pay $3.5 million in damages and civil penalties to the state of California, which had been investigating the questionable practices for three years, the attorney general said. The bank had used a computerised program to automatically remove positive balances, or credits, from customers' accounts.

The bank will also pay 10-per cent interest to California customers, who accounted for $1.6 million of the money "swept" out of accounts and into a Citi fund between 1992 and 2003. But it said it "takes issue" with the statement by California Attorney General Edmund G Brown Jr. that foul play was involved in the sweep. Citi argues the sweep was a technical issue.

The attorney general said the affected accounts were in "recovery" status, including accounts of customers who had died, sought bankruptcy protection or were the target of litigation or collection efforts by the New York-based bank. Brown said accounts could show credit balances if customers paid bills twice by mistake, or returned purchases for credit.

Citi argues that the programme was intended to move funds that belonged to Citi, namely attorney fees and interest awarded through litigation. The funds also involved customers' unclaimed money.

"The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps," Brown said in a press release. "When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice."

The Attorney General also alleged that a Citi executive told the whistleblower, Andrew Mellon, that "stealing from our customers is a business decision," and that the sweep programme could not be stopped. Mellon was subsequently fired and filed a sealed wrongful dismissal law suit with the Attorney General in 2005. Citi did not cooperate with the Attorney General's investigation, Brown's office said.